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REIS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. Organization and Business Reis, Inc. is a Maryland corporation. When we refer to "Reis" or the "Company," we are referring to Reis, Inc. and its consolidated subsidiaries. The Company provides commercial real estate market information and analytical tools to real estate professionals, through its Reis Services subsidiary. For disclosure and financial reporting purposes, this business is referred to as the Reis Services segment. Reis Services Reis Services, including its predecessors, was founded in 1980. Reis maintains a proprietary database containing detailed information on commercial properties in metropolitan markets and neighborhoods throughout the U.S. The database contains information on apartment, office, retail, warehouse/distribution, flex/research & development, self storage and seniors housing properties, and is used by real estate investors, lenders and other professionals to make informed buying, selling and financing decisions. In addition, Reis data is used by debt and equity investors to assess, quantify and manage the risks of default and loss associated with individual mortgages, properties, portfolios and real estate backed securities. Reis currently provides its information services to many of the nation's leading lending institutions, equity investors, brokers and appraisers. Product Overview The Company's product portfolio features: Reis SE, its flagship delivery platform aimed at larger and mid-sized enterprises; ReisReports, aimed at prosumers and smaller enterprises; and Mobiuss Portfolio CRE, or Mobiuss, launched in early 2013 and aimed primarily at risk managers and credit administrators at banks and non-bank lending institutions. It is through these products that Reis provides online access to a proprietary database of commercial real estate information and analytical tools designed to facilitate debt and equity transactions as well as ongoing asset and portfolio evaluations. Depending on the product or level of entitlement, users have access to market trends and forecasts at metropolitan and neighborhood levels throughout the U.S. and/or detailed building-specific information such as rents, vacancy rates, lease terms, property sales, new construction listings and property valuation estimates. Reis's products are designed to meet the demand for timely and accurate information to support the decision-making of property owners, developers, builders, banks and non-bank lenders, equity investors and service providers. These real estate professionals require access to timely information on both the performance and pricing of assets, including detailed data on market transactions, supply, absorption, rents and sale prices. This information is critical to all aspects of valuing assets and financing their acquisition, development and construction. Operations As commercial real estate markets grow in size and complexity, Reis continues to invest in the databases, technologies, intellectual capital and personnel critical to supporting the information needs of commercial real estate professionals. Specifically, Reis has: • developed expertise in data collection across multiple markets and property types; • invested in the analytical expertise to develop decision support systems that generate market trends and forecasts, property valuations, credit analytics, transaction support and risk management; • created product development expertise to collect market feedback and translate it into new products and reports; and • invested in a robust technology infrastructure to disseminate these tools to the wide variety of market participants. These investments have established Reis as a leading provider of commercial real estate information and analytical tools to the investment community. Reis continues to develop and introduce new products, expand and add new markets and data, and find new ways to deliver existing information to meet client demand, as more fully described below under "- Products and Services." The depth and breadth of Reis's data and expertise are critical in allowing Reis to grow its business. 21 -------------------------------------------------------------------------------- Table of Contents Proprietary Databases Reis develops and maintains three highly curated, proprietary databases which include information on property performance, new construction and sales comparables. The significant characteristics of the Reis databases include: • Breadth - coverage of seven property types, including apartment, office, retail, warehouse/distribution, flex/research & development, self storage and seniors housing properties; • Geography - national coverage of up to 275 of the largest U.S. metropolitan CRE markets, over 7,000 discrete market areas and segments with submarket boundaries proprietary to Reis; • Depth - captures critical information such as occupancies, rents, rent discounts, tenant improvement allowances, lease terms, expenses, buyer, seller, purchase price, capitalization rate, financing details and other key factors; • History - up to 34 years of data through multiple cycles of economic/market peaks and troughs; and • Frequency - market and submarket reports available monthly or quarterly and sales comparables and new construction information updated on daily and weekly schedules. The following table lists the number of metropolitan markets for each of the seven types of commercial real estate covered by Reis at September 30, 2014 and December 31, 2013: September 30, December 31, 2014 2013 Apartment 275 275 Retail 190 190 Office 190 190 Warehouse/distribution 47 47 Flex/research & development 47 47 Self storage 50 50 Seniors housing 57 - Reis programmatically expands its property level and market coverage by geography and property type. On May 1, 2014, Reis introduced coverage on its seventh property type, seniors housing, in 57 metropolitan markets. Reis's core property database contains information on competitive, income-producing properties in the U.S. apartment, retail, office, warehouse/distribution, flex/research & development, self storage and seniors housing sectors. On an ongoing basis, Reis surveys and receives data downloads from building owners, leasing agents and managers which include key building performance statistics including, among others: occupancy rates; rents; rent discounts and other concessions; tenant improvement allowances; lease terms; and operating expenses. In addition, Reis processes multiple data sources on commercial real estate, including: public filings databases; tax assessor records; deed transfers; planning boards; and numerous local, regional and national publications and commercial real estate web sites. Reis screens and assembles large volumes of data into integrated supply and demand trends on a monthly basis at the neighborhood (submarket) and metropolitan market levels. All collected data are subjected to a rigorous quality assurance and validation process developed over many years. At the property level, surveyors compare the data collected in the current period with data previously collected on that property and similar properties. If any unusual changes in rents and vacancies are identified, follow-up procedures are performed for verification or clarification of the results. All aggregate market data at the submarket and market levels are also subjected to comprehensive quality controls. In addition to its core property database, Reis develops and maintains a new construction database that identifies and monitors projects that are being added to our covered markets. Detailed tracking of the supply side of the commercial real estate market is critical to projecting performance changes at the market and submarket levels. This database is updated weekly and reports relevant information such as project size, property type and location for projects that are planned, proposed or under construction. Reis also maintains a sales comparables database containing transactions in up to 277 metropolitan markets. The database captures key information on each transaction, such as buyer, seller, purchase price, capitalization rate and financing details, where available, for transactions valued at greater than $250,000 in each market we cover, for our seven property types, as well as for hotel properties. 22 -------------------------------------------------------------------------------- Table of Contents Reis's long-standing relationships with thousands of data sources, including building owners, property managers and agents, represent a unique and highly valuable asset that has required decades of investment. The Company is recognized by the industry and the business and trade press as the premier source of objective, timely and granular market information, a reputation attributable to several factors: (1) Reis is viewed as independent as it does not compete as a broker in the listings space; and (2) Reis information is used by owners and managers in the underwriting, due diligence and marketing of properties, mortgages and real estate backed securities at both the single asset and portfolio levels. Products and Services Reis has invested in a robust technology infrastructure to disseminate a number of market information products to meet the demands of a wide variety of commercial real estate professionals, from a financial institution seeking an integrated commercial real estate portfolio management platform, to a single access user seeking local market intelligence through ReisReports. Reis is continually upgrading and expanding its product offering to reach new markets and new types of consumers of commercial real estate information. Reis SE Reis SE("Subscriber Edition"), available at www.reis.com, is the Company's flagship product, designed to assist in market research, due diligence and support of commercial real estate transactions, including loan originations, underwriting, acquisitions, risk assessment (such as loan loss reserves and impairment analyses), portfolio monitoring, asset management and appraisal. Reports are retrievable by street address, property type (apartment, office, retail, warehouse/distribution, flex/research & development, self storage and seniors housing) or on the market/submarket level and are available as full color, presentation quality documents or in spreadsheet formats. Key features of Reis SE include: • Market Reports - On a monthly basis, Reis provides updated trends and forecasts of rent, vacancy, and inventory for apartment, office, retail, warehouse/distribution, flex/research & development, self storage and seniors housing property types in up to 275 metropolitan areas and more than 7,000 discrete market areas and segments. • Rent Comparables - Based on a user specified area, Reis supplies property level performance data such as rents and vacancies, as well as comp group summary statistics, including concessions, operating expenses and lease terms. • Sales Comparables - Reis maintains a sales comparables database containing transactions in up to 277 metropolitan areas. The database captures key information on each transaction, such as buyer, seller, purchase price, capitalization rate and financing details, where available, for transactions valued at greater than $250,000, for eight property types including hotel properties. • Single Property Valuation - Designed to help clients quantify the value and risk associated with their commercial real estate holdings, the valuation module utilizes three valuation methods - discounted cash flow, direct capitalization and sales price per square foot - supported by comparable transactions in the local market. • "First Glance" Reports - Quarterly narrative reports provide an early assessment of the apartment, office, retail and industrial sectors across the U.S. and commentary on new construction activity. • Quarterly Briefings - Two conference calls each quarter attended by hundreds of Reis subscribers, plus members of the media, during which Reis economists provide an overview of the latest high-level findings and forecasts for the commercial real estate space and capital markets. • Real Estate News and Commentary - "Executive Briefings," the Reis "Observer" and news stories selected by Reis analysts from among hundreds of sources to provide news relevant to a particular market and property type. • Email Alerts - Customizable email alerts that let users receive proactive updates on markets of interest. Access to Reis SE is by secure password and can be customized to accommodate the coverage, property type and analytical needs of subscribers. For example, the product can be tailored to provide access to all or only selected markets, property types and report combinations. 23-------------------------------------------------------------------------------- Table of Contents ReisReports ReisReports is a product tailored to meet the needs of smaller enterprises and individuals, professional investors, brokers and appraisers, available at www.ReisReports.com. Although providing subscribers with less content and a more limited number of reports, ReisReports utilizes the same proprietary database that supports Reis SE. Depending on the package chosen by the ReisReports subscriber, content is available on a monthly or annual subscription basis at affordable price points. The addressable subscriber market for ReisReports includes hundreds of thousands of prosumers and small enterprises. To expand the total user base of ReisReports, the Company markets through various traditional and online media channels. Management believes that there is a significant opportunity to market monthly and annual subscriptions to CRE professionals active in individual metropolitan areas. Mobiuss Portfolio CRE Launched in the first quarter of 2013 and developed in partnership with Opera Solutions LLC, Mobiuss enables clients to quickly and thoroughly assess portfolio risks and opportunities by integrating client loan and property information with Reis property and submarket data and Opera Solutions' credit analytics. Opera Solutions is a leader in "Big Data" science, predictive analytics and technological innovations. The solution is delivered in a web-based, visually engaging interface. Mobiuss is targeted to both debt and equity capital providers active in U.S. commercial real estate and, specifically, to banks with significant CRE loan exposure. As a loan-level analysis and surveillance platform, Mobiuss enables property valuation, credit analysis, stress testing, benchmarking and portfolio pricing. In addition to providing credit default metrics such as expected losses and probabilities of default at the loan and portfolio levels, outputs include forecasted collateral operating incomes and values under multiple economic scenarios. These features allow clients to integrate internal data to create customizable scenario forecasts to meet regulatory stress testing requirements, set loan loss reserves and monitor their collateral. The Mobiuss platform is intended for both large and small lending institutions, Commercial Mortgage Backed Security, or CMBS, investors and equity investors, among others. Mobiuss has been designed in a modular fashion that allows banks of varying asset sizes to select the applications and price points most appropriate to the scale of their CRE portfolios. Data Redistribution / Marketing Alliances The Company has established data redistribution agreements with information service providers as part of a strategy designed to raise brand awareness and generate sales leads for Reis's information and services. Over time, third party users may enter into agreements with Reis directly in order to gain access to the full suite of reports and analytical modules. The Company's data redistribution agreements are typically multi-year contracts in length, do not afford access to Reis's proprietary database and provide limited views of Reis's market data. Reis has also established marketing alliances with the Appraisal Institute, the Certified Commercial Investment Member Institute ("CCIM") and Building Owners and Managers Association (BOMA) International to promote ReisReports to its members through discounts, e-mail outreach, website advertising and newsletter ads. As an example, our data redistribution arrangement with Bloomberg allows for Bloomberg Professional subscribers to have access to Reis's market information at {REIS < GO > } which is also integrated across property and credit valuation tools on Bloomberg's Commercial Mortgage Backed Security (CMBS) product. Bloomberg subscribers can access Reis's proprietary supply, demand and price data for the nation's largest metropolitan apartment, office, retail and industrial markets. Cost of Service Reis's data is made available in six ways, with price points that are reflective of the level of content being made available: • annual and multi-year subscriptions to Reis SE ranging in price from $1,000 to over $1,000,000, depending upon the subscriber's line of business and the combination of markets, property types and reports subscribed to, for which the subscriber is typically allowed to download an unlimited number of reports over the subscription period; renewals for Reis SE are negotiated in advance of the expiration of an existing contract based on factors such as a subscriber's historical and projected report consumption; • annual and multi-year subscriptions to Mobiuss typically ranging in price from the low tens of thousands of dollars into the hundreds of thousands of dollars; 24 -------------------------------------------------------------------------------- Table of Contents • capped Reis SE subscriptions ranging in price from $1,000 to $25,000, allowing clients to download a fixed retail value of reports over a period of up to twelve months; • subscriptions to ReisReports, which are charged to a credit card, having a retail price ranging up to $150 per month (monthly or annual pricing options are available); • custom data deliverables ranging in price from $1,000 for a specific data element to hundreds of thousands of dollars for custom portfolio valuation and credit analysis; and • individual reports, which can be purchased with a credit card, having retail prices up to $999 per report, are available to anyone who visits Reis's retail web site or contacts Reis via telephone, fax or email; however, certain reports are only available with an annual subscription or capped subscription account. Reis's revenue model is based primarily on annual subscriptions that are paid in accordance with contractual billing terms. Reis recognizes revenue from its contracts on a ratable basis; for example, one-twelfth of the value of a one-year contract is recognized monthly. Other Reis Services Information For additional information on the Reis Services business, refer to the Company's annual report on Form 10-K for the year ended December 31, 2013, which was filed with the Securities and Exchange Commission on March 6, 2014. Additional Segment Financial Information See Note 3 of the Company's consolidated financial statements included in this filing for additional information regarding all of the Company's segments, including Discontinued Operations - Residential Development Activities. Selected Significant Accounting Policies For a description of our selected significant accounting policies and estimates, see our Annual Report on Form 10-K for the year ended December 31, 2013. Critical Business Metrics of the Reis Services Business Management considers certain metrics in evaluating the performance of the Reis Services business. These metrics are revenue, revenue growth, EBITDA (which is earnings (defined as income (loss) from continuing operations) before interest, taxes, depreciation and amortization), EBITDA growth and EBITDA margin. Other important metrics that management considers include the cash flow generation of the Reis Services business as well as the visibility into future performance as supported by our deferred revenue and other related metrics discussed in this Item 2. Following is a presentation of revenue, EBITDA and EBITDA margin for the Reis Services business (see below for a reconciliation of income from continuing operations to EBITDA and Adjusted EBITDA for both the Reis Services segment and on a consolidated basis for each of the periods presented here). 25 -------------------------------------------------------------------------------- Table of Contents (amounts in thousands, excluding percentages) For the Three Months Ended September 30, Percentage 2014 2013 Increase Increase Revenue $ 10,469 $ 8,780 $ 1,689 19.2% EBITDA $ 4,285 $ 3,679 $ 606 16.5% EBITDA margin 40.9% 41.9% For the Nine Months Ended September 30, Percentage 2014 2013 Increase Increase Revenue $ 30,609 $ 25,512 $ 5,097 20.0% EBITDA $ 12,442 $ 10,519 $ 1,923 18.3% EBITDA margin 40.6% 41.2% For the Three Months Ended September 30, June 30, Percentage 2014 2014 Increase Increase Revenue $ 10,469 $ 10,194 $ 275 2.7% EBITDA $ 4,285 $ 4,091 $ 194 4.7% EBITDA margin 40.9% 40.1% Reis Services's revenue increased by approximately $1,689,000, or 19.2%, from the third quarter of 2013 to the third quarter of 2014 and increased approximately $5,097,000, or 20.0%, from the nine months ended September 30, 2013 to the 2014 comparable nine month period. The revenue increase over the corresponding prior quarterly period is the 18th consecutive quarterly increase in subscription revenue over the prior year's quarter. In addition, revenue increased by approximately $275,000, or 2.7%, from the second quarter of 2014 to the third quarter of 2014. In general, these revenue increases in 2014 reflect: (1) additional new Reis SE business; (2) revenue growth from Mobiuss; and (3) revenue growth from ReisReports. The Company's revenue growth reflects not just a single strong quarter, but also the momentum created by sustained contract growth during 2013 and through the first three quarters of 2014. The Company continues to post record bookings performance with respect to both the number and dollar value of contracts. Fiscal 2013, as well as the fourth quarter of 2013, represented unprecedented contract signings, surpassed again by 2014's year to date and third quarter results. The Company was able to achieve the revenue growth rates reported above while its renewal rates have been modestly trending lower over the past few quarters. The Company's overall renewal rates were 88% and 91% for the trailing twelve months ended September 30, 2014 and 2013, respectively (for institutional subscribers, the renewal rates were 90% and 92% for the trailing twelve months ended September 30, 2014 and 2013, respectively). The decline in the renewal rates reflects the Company's decision to be more aggressive on renewal pricing, particularly in instances where customer usage levels are significantly greater than what was initially estimated as annual usage for that customer. The Company believes that aligning client report consumption with appropriate annual fees, while remaining respectful of subscriber need for Reis information, is more important in the long-term, than a modest decline in the current renewal rate. Also, based upon past experience, management believes that many non-renewing customers ultimately renew with Reis as their information and analytic needs may not be fully addressed by competitive offerings. Reis's revenue model is based primarily on annual subscriptions that are paid in accordance with contractual billing terms. Reis recognizes revenue from its contracts on a ratable basis; for example, one-twelfth of the value of a one-year contract is recognized monthly. Therefore, increases in the dollar value of new contracts are spread evenly over the life of a contract, thereby moderating an immediate impact on revenue. Historically, the largest percentage of our contracts are executed in the fourth quarter of each year and 2014 should not be an exception to that trend. Two additional metrics management utilizes are deferred revenue and Aggregate Revenue Under Contract. Analyzing these amounts can provide additional insight into Reis Services's future financial performance. Deferred revenue, which is a GAAP basis accounting concept and is reported by the Company on the consolidated balance sheet, represents revenue from annual or longer term contracts for which we have billed and/or received payments from our subscribers related to services we will be providing over the remaining contract period. It does not include future revenue under non-cancellable contracts for which we do not yet have the contractual right to bill; this aggregate number we refer to as Aggregate Revenue Under Contract. Deferred revenue will be recognized as revenue ratably over the remaining life of a contract. The following table reconciles deferred revenue to Aggregate Revenue Under Contract at September 30, 2014 and 2013, respectively. A comparison of these balances at September 30 of each year is more meaningful than a comparison to the December 31, 2013 balances, as a greater percentage of renewals occur in the fourth quarter of each year and would distort the analysis. 26 -------------------------------------------------------------------------------- Table of Contents September 30, 2014 2013 Deferred revenue (GAAP basis) $ 18,188,000 $ 15,467,000 Amounts under non-cancellable contracts for which the Company does not yet have the contractual right to bill at the period end (A) 22,519,000 20,134,000 Aggregate Revenue Under Contract $ 40,707,000 $ 35,601,000 (A) Amounts are billable subsequent to September 30 of each year and represent (1) non-cancellable contracts for subscribers with multi-year subscriptions where the future years are not yet billable, or (2) subscribers with non-cancellable annual subscriptions with interim billing terms. Included in Aggregate Revenue Under Contract at September 30, 2014 was approximately $27,318,000 related to amounts under contract for the forward twelve month period through September 30, 2015. The remainder reflects amounts under contract beyond September 30, 2015. The forward twelve month Aggregate Revenue Under Contract amount is 68.6% of revenue on a trailing twelve month basis at September 30, 2014 of approximately $39,818,000. For comparison purposes, at September 30, 2013, the forward twelve month Aggregate Revenue Under Contract of $24,096,000 was 70.7% of revenue on a trailing twelve month basis at September 30, 2013. Both deferred revenue and Aggregate Revenue Under Contract are influenced by: (1) the timing and dollar value of contracts signed and billed; (2) the quantity and timing of contracts that are multi-year; and (3) the impact of recording revenue ratably over the life of a multi-year contract, which moderates the effect of price increases after the first year. The then-record new business and contract signings in 2013, exceeded by the historic level of new business contracted during the nine months ended September 30, 2014 and the increased number of multi-year contracts signed in 2014, has had a significant positive impact on our reported amounts of deferred revenue and Aggregate Revenue Under Contract at September 30, 2014. Reis Services EBITDA for the three months ended September 30, 2014 was $4,285,000, an increase of $606,000, or 16.5%, over the third quarter 2013 amount. The EBITDA increase over the corresponding prior quarterly period is the 16th consecutive quarterly increase in EBITDA over the prior year's quarter. For the nine months ended September 30, 2014, Reis Services EBITDA was $12,442,000, an increase of $1,923,000, or 18.3%, over the comparable 2013 nine month period. On a consecutive quarter basis, Reis Services EBITDA increased $194,000, or 4.7%, from the second quarter of 2014 to the third quarter of 2014. These increases were primarily derived from the increases in revenue, as described above. Operating expenses also continued to grow, the net effect of which resulted in the Reis Services EBITDA margins of 40.9% and 40.6% for the three and nine months ended September 30, 2014, respectively as compared to 41.9% and 41.2% in the 2013 comparable periods. The reduction in the margins was the result of increased personnel related costs and our investment in maintaining our databases and new marketing initiatives. Investment in our business remains a priority. This includes the development of new products and functionality, introducing new, or expanding existing databases, adding resources to grow our customer base and generate more revenue. Accordingly, we continue to hire in many departments, including in sales (both new business and account management) as well as in operations, including our data collection departments. With a growing head count, the Company leased additional space in the third quarter of 2013. The impact of this additional expense began in the fourth quarter of 2013. Separately, as Reis's business continues to grow, we are devoting additional resources to expand our sales pipeline through marketing efforts and sales force expansion. Collectively, the effects of increased personnel costs and our investment and marketing initiatives have resulted in margin reductions to the levels for the three and nine months ended September 30, 2014, reported above. The expectation for spending in the remainder of 2014 and into 2015 may result in margins for future quarters being at or below the 40.9% Reis Services EBITDA margin we reported for the third quarter of 2014. Reconciliations of Income from Continuing Operations to EBITDA and Adjusted EBITDA (Segment and Consolidated) We define EBITDA as earnings (defined as income (loss) from continuing operations) before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as earnings before interest, taxes, depreciation, amortization and stock based compensation. Although EBITDA and Adjusted EBITDA are not measures of performance calculated in accordance with GAAP, senior management uses EBITDA and Adjusted EBITDA to measure operational and management performance. Management believes that EBITDA and Adjusted EBITDA are appropriate supplemental financial measures to be considered in addition to the reported GAAP basis financial information which may assist investors in evaluating and understanding: (1) the performance of the Reis Services segment, the primary business of the Company and (2) the Company's continuing consolidated results, from year to year or period to period, as applicable. Further, these measures provide the reader with the ability to understand our operational performance while isolating non-cash charges, such as depreciation and amortization expenses, as well as other non-operating items, such as interest income, interest expense and income taxes and, in the case of Adjusted EBITDA, isolates non-cash charges for stock based compensation. Management also believes that disclosing EBITDA and Adjusted EBITDA will provide better comparability to 27-------------------------------------------------------------------------------- Table of Contents other companies in the information services sector. However, because EBITDA and Adjusted EBITDA are not calculated in accordance with GAAP, they may not necessarily be comparable to similarly titled measures employed by other companies. EBITDA and Adjusted EBITDA are presented both for the Reis Services business and on a consolidated basis. We believe that these metrics, for Reis Services, provide the reader with valuable information for evaluating the financial performance of the core Reis Services business, excluding public company costs, and for making assessments about the intrinsic value of that stand-alone business to a potential acquirer. Management primarily monitors and measures its performance, and is compensated, based on the results of the Reis Services business. EBITDA and Adjusted EBITDA, on a consolidated basis, allow the reader to make assessments about the current trading value of the Company's common stock, including expenses related to operating as a public company. However, investors should not consider these measures in isolation or as substitutes for net income (loss), income from continuing operations, operating income, or any other measure for determining operating performance that is calculated in accordance with GAAP. Reconciliations of EBITDA and Adjusted EBITDA to the most comparable GAAP financial measure, income from continuing operations, follow for each identified period on a segment basis (including the Reis Services segment), as well as on a consolidated basis: (amounts in thousands) Reconciliation of Income from Continuing Operations to EBITDA and By Segment Adjusted EBITDA for the Three Months Ended September 30, 2014 Reis Services Other (A) Consolidated Income from continuing operations $ 1,130 Income tax expense 743 Income (loss) before income taxes and discontinued operations $ 2,924 $ (1,051) 1,873 Add back: Depreciation and amortization expense 1,339 2 1,341 Interest expense, net 22 - 22 EBITDA 4,285 (1,049) 3,236 Add back: Stock based compensation expense, net - 437 437 Adjusted EBITDA $ 4,285 $ (612) $ 3,673 Adjusted EBITDA margin - Reis Services and consolidated (B) 40.9% 35.1% Reconciliation of Income from Continuing Operations to EBITDA and By Segment Adjusted EBITDA for the Three Months Ended September 30, 2013 Reis Services Other (A) Consolidated Income from continuing operations $ 705 Income tax expense 469 Income (loss) before income taxes and discontinued operations $ 2,381 $ (1,207) 1,174 Add back: Depreciation and amortization expense 1,273 2 1,275 Interest expense, net 25 - 25 EBITDA 3,679 (1,205) 2,474 Add back: Stock based compensation expense, net - 329 329 Adjusted EBITDA $ 3,679 $ (876) $ 2,803 Adjusted EBITDA margin - Reis Services and consolidated (B) 41.9% 31.9% Reconciliation of Income from Continuing Operations to EBITDA and By Segment Adjusted EBITDA for the Nine Months Ended September 30, 2014 Reis Services Other (A) Consolidated Income from continuing operations $ 3,092 Income tax expense 2,074 Income (loss) before income taxes and discontinued operations $ 8,486 $ (3,320) 5,166 Add back: Depreciation and amortization expense 3,887 7 3,894 Interest expense, net 69 - 69 EBITDA 12,442 (3,313) 9,129 Add back: Stock based compensation expense, net - 1,307 1,307 Adjusted EBITDA $ 12,442 $ (2,006) $ 10,436 Adjusted EBITDA margin - Reis Services and consolidated (B) 40.6% 34.1% See footnotes on next page. 28 -------------------------------------------------------------------------------- Table of Contents (amounts in thousands) Reconciliation of Income from Continuing Operations to EBITDA and By Segment Adjusted EBITDA for the Nine Months Ended September 30, 2013 Reis Services Other (A) Consolidated Income from continuing operations $ 1,629 Income tax expense 1,081 Income (loss) before income taxes and discontinued operations $ 6,672 $ (3,962) 2,710 Add back: Depreciation and amortization expense 3,770 7 3,777 Interest expense, net 77 - 77 EBITDA 10,519 (3,955) 6,564 Add back: Stock based compensation expense, net - 1,562 1,562 Adjusted EBITDA $ 10,519 $ (2,393) $ 8,126 Adjusted EBITDA margin - Reis Services and consolidated (B) 41.2% 31.9% Reconciliation of Income from Continuing Operations to EBITDA and By Segment Adjusted EBITDA for the Three Months Ended June 30, 2014 Reis Services Other (A) Consolidated Income from continuing operations $ 915 Income tax expense 726 Income (loss) before income taxes and discontinued operations $ 2,764 $ (1,123) 1,641 Add back: Depreciation and amortization expense 1,305 3 1,308 Interest expense, net 22 - 22 EBITDA 4,091 (1,120) 2,971 Add back: Stock based compensation expense, net - 435 435 Adjusted EBITDA $ 4,091 $ (685) $ 3,406 Adjusted EBITDA margin - Reis Services and consolidated (B) 40.1% 33.4% (A) Includes interest and other income, depreciation expense and general and administrative expenses (including public company related costs) that are not associated with the Reis Services segment. Since the reconciliations start with income from continuing operations, the effects of the discontinued operations (Residential Development Activities) are excluded from these reconciliations for all periods presented. (B) Reflects an Adjusted EBITDA margin on the Reis Services segment and on a consolidated basis, both of which exclude the impact of discontinued operations. 29 -------------------------------------------------------------------------------- Table of Contents Results of Operations Comparison of the Results of Operations for the Three Months Ended September 30, 2014 and 2013 Subscription revenues and related cost of sales were approximately $10,469,000 and $2,073,000, respectively, for the three months ended September 30, 2014, which resulted in a gross profit for the Reis Services segment of approximately $8,396,000. Amortization expense included in cost of sales (for the database intangible asset) was approximately $458,000 during this period. Subscription revenues and related cost of sales were approximately $8,780,000 and $1,755,000, respectively, for the three months ended September 30, 2013, resulting in a gross profit for the Reis Services segment of approximately $7,025,000. Amortization expense included in cost of sales (for the database intangible asset) was approximately $395,000 during this period. See "- Critical Business Metrics of the Reis Services Business" for a discussion of the variances and trends in revenue and EBITDA of the Reis Services segment. The increase in cost of sales of $318,000 resulted from greater employment related costs, specifically from hiring during 2013 and 2014, coupled with compensation increases and higher benefit costs than in the 2013 period of $255,000 and a $63,000 increase in amortization expense for database costs as a result of the addition of a new property type in 2014 (seniors housing). Sales and marketing expenses were approximately $2,573,000 and $2,097,000 for the three months ended September 30, 2014 and 2013, respectively, and solely represented costs of the Reis Services segment. Amortization expense included in sales and marketing expenses (for the customer relationships intangible asset) was approximately $240,000 and $243,000 during the three months ended September 30, 2014 and 2013, respectively. The increase in sales and marketing expenses between the two periods of approximately $476,000 resulted from greater employment related costs from hiring during 2013 and 2014 and increased commissions expense, coupled with compensation increases and higher benefit costs than in the 2013 period. Product development expenses were approximately $946,000 and $836,000 for the three months ended September 30, 2014 and 2013, respectively, and solely represented costs of the Reis Services segment. Amortization expense included in product development expenses (for the web site intangible asset) was approximately $476,000 and $480,000 during the three months ended September 30, 2014 and 2013, respectively. Product development costs increased $110,000, primarily due to increased employment related costs from hiring during 2013, coupled with compensation increases and higher benefit costs than in the 2013 period of $114,000, offset by a net $4,000 decrease in amortization expense for web site costs due to the completion of amortization in the first half of 2013 related to significant prior year product releases (including the 2010 introduction of ReisReports and monthly publication of data). General and administrative expenses of approximately $2,982,000 for the three months ended September 30, 2014 included current period expenses of approximately $2,377,000, depreciation and amortization expense of approximately $168,000 for lease value and furniture, fixtures and equipment, and approximately $437,000 of net non-cash compensation expense. The net non-cash compensation expense was comprised of equity awards for employees and directors of approximately $415,000, and by an approximate $22,000 increase in the liability for option cancellations due to an increase in the market price of the Company's common stock from $21.08 per share at June 30, 2014 to $23.59 per share at September 30, 2014. General and administrative expenses of approximately $2,893,000 for the three months ended September 30, 2013 include current period expenses of approximately $2,407,000, depreciation and amortization expense of approximately $157,000 for lease value and furniture, fixtures and equipment, and approximately $329,000 of net non-cash compensation expense. The net non-cash compensation expense is comprised of compensation expense resulting from equity awards for employees and directors of approximately $412,000, offset by an approximate $83,000 decrease in the liability for option cancellations due to a decrease in the market price of the Company's common stock from $18.49 per share at June 30, 2013 to $16.15 per share at September 30, 2013. Excluding the non-cash expenses, the net decrease in general and administrative expenses of $30,000 is primarily a result of a reduction in public company segment related professional fees from 2013 to 2014, offset by increased employment related costs from hiring during 2013, coupled with compensation increases and higher benefit costs than in the 2013 period and other personnel related costs (including additional rent expense). Interest expense of $28,000 during the three months ended September 30, 2014 and 2013 was comprised of unused facility fees and deferred financing cost amortization on the Company's revolving credit facility, which we refer to as the Revolver. There was no outstanding balance on the Revolver during the three months ended September 30, 2014 or 2013. The aggregate income tax expense applicable to continuing operations was $743,000 during the three months ended September 30, 2014, which reflected current alternative minimum tax of $41,000, current state and local tax expense of $110,000, deferred Federal tax expense of $585,000 and deferred state and local tax expense of $7,000. The aggregate income tax expense applicable to continuing operations was $469,000 during the three months ended September 30, 2013, which reflected deferred Federal tax expense of $384,000, deferred state and local tax expense of $79,000, and Federal AMT of $6,000. 30-------------------------------------------------------------------------------- Table of Contents The loss from discontinued operations was $50,000 for the three months ended September 30, 2014 and primarily reflected legal and professional fees of $94,000 in connection with our recovery efforts (related to the 2012 Gold Peak settlement of $17,000,000), offset by $10,000 of recoveries during the period and an income tax benefit of $34,000. The loss from discontinued operations was $56,000 for the three months ended September 30, 2013 and primarily reflected legal and professional fees of $92,000 in connection with our recovery efforts related to the Gold Peak settlement, offset by an income tax benefit of $36,000. Comparison of the Results of Operations for the Nine Months Ended September 30, 2014 and 2013 Subscription revenues and related cost of sales were approximately $30,609,000 and $5,963,000, respectively, for the nine months ended September 30, 2014, which resulted in a gross profit for the Reis Services segment of approximately $24,646,000. Amortization expense included in cost of sales (for the database intangible asset) was approximately $1,310,000 during this period. Subscription revenues and related cost of sales were approximately $25,512,000 and $5,111,000, respectively, for the nine months ended September 30, 2013, resulting in a gross profit for the Reis Services segment of approximately $20,401,000. Amortization expense included in cost of sales was approximately $1,144,000 during this period. See "- Critical Business Metrics of the Reis Services Business" for a discussion of the variances and trends in revenue and EBITDA of the Reis Services segment. The increase in cost of sales of $852,000 resulted from greater employment related costs, specifically from hiring during 2013 and 2014, coupled with compensation increases and higher benefit costs than in the 2013 period of $686,000 and a $166,000 increase in amortization expense for database costs as a result of the addition of a new property type in 2014 (seniors housing). Sales and marketing expenses were approximately $7,666,000 and $6,098,000 for the nine months ended September 30, 2014 and 2013, respectively, and solely represented costs of the Reis Services segment. Amortization expense included in sales and marketing expenses (for the customer relationships intangible asset) was approximately $722,000 and $731,000 during the nine months ended September 30, 2014 and 2013, respectively. The increase in sales and marketing expenses between the two periods of approximately $1,568,000 resulted from greater employment related costs from hiring during 2013 and 2014 and increased commissions expense, coupled with compensation increases and higher benefit costs than in the 2013 period. Product development expenses were approximately $2,523,000 and $2,349,000 for the nine months ended September 30, 2014 and 2013, respectively, and solely represented costs of the Reis Services segment. Amortization expense included in product development expenses (for the web site intangible asset) was approximately $1,352,000 and $1,434,000 during the nine months ended September 30, 2014 and 2013, respectively. Product development costs increased $174,000, primarily due to increased employment related costs from hiring during 2013, coupled with compensation increases and higher benefit costs than in the 2013 period of $256,000, offset by a net $82,000 decrease in amortization expense for web site costs due to the completion of amortization in the first half of 2013 related to significant prior year product releases (including the 2010 introduction of ReisReports and monthly publication of data). General and administrative expenses of approximately $9,222,000 for the nine months ended September 30, 2014 included current period expenses of approximately $7,405,000, depreciation and amortization expense of approximately $510,000 for lease value and furniture, fixtures and equipment, and approximately $1,307,000 of net non-cash compensation expense. The net non-cash compensation expense was comprised of equity awards for employees and directors of approximately $1,271,000, and by an approximate $36,000 increase in the liability for option cancellations due to an increase in the market price of the Company's common stock from $19.23 per share at December 31, 2013 to $23.59 per share at September 30, 2014. General and administrative expenses of approximately $9,167,000 for the nine months ended September 30, 2013 include current period expenses of approximately $7,137,000, depreciation and amortization expense of approximately $468,000 for lease value and furniture, fixtures and equipment, and approximately $1,562,000 of net non-cash compensation expense. The net non-cash compensation expense is comprised of compensation expense resulting from equity awards for employees and directors of approximately $1,451,000 and by an approximate $111,000 increase in the liability for option cancellations due to an increase in the market price of the Company's common stock from $13.03 per share at December 31, 2012 to $16.15 per share at September 30, 2013. Excluding the non-cash expenses, the net increase in general and administrative expenses of $268,000 is primarily a result of increased employment related costs from hiring during 2013, coupled with compensation increases and higher benefit costs than in the 2013 period and other personnel related costs (including additional rent expense), partially offset by a reduction in public company segment related professional fees from 2013 to 2014. Interest expense of $84,000 during the nine months ended September 30, 2014 and 2013 was comprised of unused facility fees and deferred financing cost amortization on the Revolver. There was no outstanding balance on the Revolver during the nine months ended September 30, 2014 or 2013. The aggregate income tax expense applicable to continuing operations was $2,074,000 during the nine months ended September 30, 2014, which reflected current alternative minimum tax of $68,000, current state and local tax expense of $185,000, deferred Federal 31 -------------------------------------------------------------------------------- Table of Contents tax expense of $1,692,000 and deferred state and local tax expense of $129,000. The aggregate income tax expense applicable to continuing operations was $1,081,000 during the nine months ended September 30, 2013, which reflected deferred Federal tax expense of $892,000 and deferred state and local tax expense of $183,000. The loss from discontinued operations was $521,000 for the nine months ended September 30, 2014 and primarily reflected legal and professional fees of $898,000 in connection with our recovery efforts (related to the 2012 Gold Peak settlement of $17,000,000), offset by $26,000 of recoveries during the period and an income tax benefit of $351,000. The loss from discontinued operations was $246,000 for the nine months ended September 30, 2013 and primarily reflected legal and professional fees of $485,000 in connection with our recovery efforts related to the Gold Peak settlement, offset by $80,000 of recoveries during the period and an income tax benefit of $159,000. Income Taxes During March 2014, New York State enacted a law to reduce corporate tax rates, effective in future years. As a consequence, the Company evaluated all elements affecting the balance of its net deferred tax assets, including the availability of New York State and New York City net operating loss carryforwards and this change in the law in New York State. The impact of this evaluation resulted in a net increase in the deferred tax asset of $29,000 during 2014. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The net deferred tax asset was approximately $22,351,000 and $23,789,000 at September 30, 2014 and December 31, 2013, respectively, of which $2,413,000 and $2,472,000 is reflected as a net current asset in prepaid and other assets and $19,938,000 and $21,317,000 is reflected separately as a net non-current asset in the accompanying consolidated balance sheets. The significant portion of the deferred tax items relates to deferred tax assets including NOL carryforwards, Federal AMT credit carryforwards and stock based compensation, with the remainder of the deferred tax items relating to liabilities resulting from the intangible assets recorded at the time of the Merger. The Company has aggregate Federal, state and local NOL carryforwards aggregating approximately $65,984,000 at December 31, 2013. These NOLs include NOLs generated subsequent to the Merger, losses from the Reis Services business prior to the Merger, losses obtained from the Company's 1998 merger with Value Property Trust ("VLP") and the Company's operating losses prior to the Merger. Approximately $25,136,000 of these Federal NOLs are subject to an annual limitation, whereas the remaining balance of approximately $40,848,000 is not subject to such a limitation. There is an annual limitation on the use of NOLs after an ownership change, pursuant to Section 382 of the Internal Revenue Code. As a result of the Merger, the Company experienced such an ownership change which resulted in a new annual limitation of $2,779,000. However, because of the accumulation of annual limitations, it is expected that the use of NOLs will not be limited by expiration. The New York State law discussed above limits the amount of existing NOLs which could be used each year in that state; however, all such losses are expected to be utilized in the future. A valuation allowance is required to reduce deferred tax assets if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As a result of management's current evaluation of the Company's future operations, it has been determined that no valuation allowance was necessary at September 30, 2014 or December 31, 2013. Liquidity and Capital Resources The core Reis Services business has traditionally generated significant cash annually; we expect it to continue to do so. Our consolidated cash and cash equivalents balance aggregated approximately $16,398,000 at September 30, 2014, an increase of $5,838,000 over the December 31, 2013 balance of approximately $10,560,000. The cash balance at September 30, 2014 was consistent with the June 30, 2014 balance of $16,403,000. The Company was able to maintain this level of cash at the end of the third quarter while meeting all of its operational costs and obligations in addition to paying an aggregate dividend of $1,233,000 in September 2014. Our cash balance decreased significantly during the year ended December 31, 2012 from the $17,000,000 settlement of the Gold Peak litigation and the repayment of approximately $5,691,000 of outstanding debt. Cash generation of the Reis Services business in 2013 and the first nine months of 2014 has been solely responsible for the replenishment of our cash balance. In addition to the cash generation of the Reis Services business, in October 2012, the Company obtained the three year $10,000,000 Revolver to provide working capital flexibility; no borrowings have been made on the Revolver since it was obtained. Separately, the Company is seeking recovery under all available insurance policies, and is pursuing appropriate additional actions against other potentially responsible parties related to Gold Peak. To date, these efforts have resulted in the recovery of approximately $819,000 of cash by 32-------------------------------------------------------------------------------- Table of Contents September 30, 2014, including approximately $10,000 and $26,000 recovered during the three and nine months ended September 30, 2014. There can be no assurance that the Company will recover any additional amounts in the short or long-term from these efforts. At September 30, 2014, the Company's short-term liquidity requirements include: current operating and capitalizable costs, including accounts payable and other accrued expenses; near-term product development and enhancement of the web site and databases; operating leases; growth in operating expenses from a further increase in the number of Reis employees and additional resources being devoted to our sales and marketing efforts; insurance deductibles and legal costs related to discontinued operations; other costs, including public company expenses not included in the Reis Services segment; the resolution of open tax years with state and local tax authorities; the potential settlement of certain outstanding stock options in cash (the liability for which was approximately $173,000 at September 30, 2014, based upon the closing stock price of the Company at September 30, 2014, of $23.59 per share); and the use of cash for the payment of quarterly dividends. The Company expects to meet these short-term liquidity requirements generally through the use of available cash and cash generated from subscription revenue of Reis Services and, if necessary, with borrowings under the Revolver. There could be additional cash inflows from insurance recoveries, or from other potentially responsible parties, related to the Gold Peak litigation; however, there can be no assurance that the Company will recover any additional amounts in the short or long-term. The Company has NOLs that it expects to be able to use over many years against future Federal, state and local taxable income, if any. Tax payments related to 2014 are expected to be for state and local taxes on income and Federal AMT, but not for Federal income taxes. The Company's long-term liquidity requirements, beyond 2014, may include: future operating and capitalizable costs, including accounts payable and other accrued expenses; long-term product development and enhancements of the web sites and databases; operating leases and other capital expenditures; growth in operating expenses from a further increase in the number of Reis employees and additional resources being devoted to our sales and marketing efforts; other costs, including public company expenses not included in the Reis Services segment; the resolution of open tax years with state and local tax authorities; the possible payment of employee taxes on vested equity awards, for which the employee uses shares to settle his/her minimum withholding tax obligations with the Company; and the use of cash for the payment of quarterly dividends. The Company expects to meet these long-term liquidity requirements generally through the use of available cash and cash generated from subscription revenue of Reis Services and, if necessary, with borrowings under the Revolver or a replacement facility. The Company may consider, based on market conditions and business needs, refinancing or otherwise amending or replacing the Revolver, though there can be no assurance we will do so, or be able to do so on terms acceptable to us. There could be additional cash inflows from insurance recoveries, or from other potentially responsible parties, both related to the Gold Peak litigation; however, there can be no assurance that the Company will recover any additional amounts in the short or long-term. The Company has NOLs that it expects to be able to use beyond the next few years against future Federal, state and local taxable income, if any. Tax payments related to 2014 and possibly 2015 are expected to be for state and local taxes on income and Federal AMT, but not for Federal income taxes. Subsequent to 2015, tax payments are expected to be for alternative state and local taxes and Federal AMT, but not for Federal, state or local taxes on income. In 2015 and thereafter, as a result of the new tax law enacted in New York State in March 2014, the use of certain NOLs for New York State purposes will be subject to an annual limitation and therefore, any taxes in excess of the limitation will need to be paid in those periods. The Company may determine to use its cash to: (1) acquire or invest in other databases or information companies that have logical adjacencies or complementary products or services; (2) repurchase shares of Reis common stock; or (3) pay a special dividend, or increase its recurring quarterly dividend. There can be no assurance that the Company will use its cash for any of these purposes during 2014 or thereafter. The Company commenced a quarterly dividend program in the second quarter of 2014 when it declared and paid an initial quarterly cash dividend of $0.11 per common share to common stockholders of record at the close of business on June 11, 2014. In the third quarter of 2014, the Company declared and paid a quarterly cash dividend of $0.11 per common share to common stockholders of record at the close of business on September 10, 2014. Aggregate dividends paid during the three and nine months ended September 30, 2014 were $1,233,000 and $2,462,000, respectively. Although the Company anticipates paying a quarterly dividend hereafter, future dividends are subject to approval by the Board. Changes in Cash Flows Cash flows for the nine months ended September 30, 2014 and 2013 are summarized as follows: For the Nine Months Ended September 30, 2014 2013 Net cash provided by operating activities $ 11,299,346 $ 9,991,489 Cash (used in) investing activities (3,202,712) (3,429,529) Cash (used in) financing activities (2,258,925) (1,280,376) Net increase in cash and cash equivalents $ 5,837,709 $ 5,281,584 33 -------------------------------------------------------------------------------- Table of Contents Net cash provided by operating activities increased $1,308,000 from $9,991,000 provided in the 2013 period to $11,299,000 provided in the 2014 period. This increase was the result of increased operating cash flow of $1,260,000 from the Reis Services segment due to growth in revenue and EBITDA and the timing of accounts receivable collections. Cash used in investing activities decreased $228,000 from $3,430,000 used in the 2013 period to $3,202,000 used in the 2014 period. This change resulted from a $128,000 decrease in furniture, fixtures and equipment purchases as the 2013 period included spending in connection with additional office space leased in 2013, coupled with a $100,000 decrease of cash used in the 2014 period as compared to the 2013 period for web site and database development costs for continuing product development and enhancement initiatives. The expectation for 2014 is that cash used for web site and database development will exceed 2013 amounts. Cash used in financing activities was $2,259,000 and $1,280,000 in the 2014 and 2013 periods, respectively. In the 2014 period, this amount includes $2,462,000 for dividends declared and paid in the second and third quarters of 2014 and $132,000 for option cancellations, offset by proceeds received from employees for option exercises in the third quarter of 2014 aggregating $335,000. In the 2013 period, cash used in financing activities was solely for restricted stock unit settlements. Cautionary Statement Regarding Forward-Looking Statements This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to the Company's or management's outlook or expectations for earnings, revenues, expenses, asset quality, or other future financial or business performance, strategies, prospects or expectations, or the impact of legal, regulatory or supervisory matters on our business, operations or performance. Specifically, forward-looking statements may include: • statements relating to future services and product development of the Reis Services segment; • statements relating to business prospects, potential acquisitions, sources and uses of cash, revenue, expenses, income (loss) from continuing or discontinued operations, cash flows, valuation of assets and liabilities and other business metrics of the Company and its businesses, including EBITDA, Adjusted EBITDA and Aggregate Revenue Under Contract; and • statements preceded by, followed by or that include the words "estimate," "plan," "project," "intend," "expect," "anticipate," "believe," "seek," "target" or similar expressions relating to future periods. Forward-looking statements reflect management's judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. With respect to these forward-looking statements, management has made certain assumptions. Future performance cannot be assured. Actual results may differ materially from those contemplated by the forward-looking statements. Some factors that could cause actual results to differ include: • lower than expected revenues and other performance measures such as income from continuing operations, EBITDA and Adjusted EBITDA; • inability to retain and increase the Company's subscriber base; • inability to execute properly on new products and services, or failure of subscribers to accept these products and services; • competition; • inability to attract and retain sales and senior management personnel; • inability to access adequate capital to fund operations and investments in our business; • difficulties in protecting the security, confidentiality, integrity and reliability of the Company's data; • changes in accounting policies or practices; • legal and regulatory issues; • the results of pending, threatening or future litigation; and 34 -------------------------------------------------------------------------------- Table of Contents • the risk factors listed under "Item 1A. Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2013, which was filed with the Securities and Exchange Commission on March 6, 2014. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this quarterly report on Form 10-Q. Except as required by law, the Company undertakes no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this quarterly report on Form 10-Q or to reflect the occurrence of unanticipated events. |